Bankrupt and Distressed (BAD) Research and Due Diligence

[Madclown]

QSGIQ POR: Here's why we're not interested

I looked at the QSGIQ POR but decided I would pass on buying a stock that is currently trading at 17 to 25 times what it is actually worth under the terms of the POR which gives 13% of the new stock to current shareholders. The real issue centers on what is 13% of the new company worth and what is the value of a share of QSGIQ? Let’s look at what the new company is worth based on a couple of different data points.

The company is projecting $600k in estimated EBITDA for 2011 based on Docket # 332 Exhibit C. Putting a 5x multiple on the $600k EBITDA yields an estimated enterprise value of $3 million. According to the plan it looks like there will be 21.8 million shares of the new company or “Newco” after reverse splits and after an additional 10 million shares (split adjusted) are issued for working capital. This valuation method would yield value of $0.137 per share for the Newco stock. Do not mistake this for the value of the shares trading right now as QSGIQ, this is because the 20:1 split would yield a value of about $.0069 per share for the current QSGIQ stock. You get there by dividing the very ambitious $0.137 value of the Newco stock by 20. You must do this to determine the value of QSGIQ because for every (20) shares of QSGIQ you own you will exchange them for (1) share of the new company stock as part of the R/S. Don’t like that valuation? Read further and let’s look at the value under a “pump free” market tested condition.

The new Company is issuing up to 10 million new shares or $1 million cash in the aggregate in order to raise operating cash so it looks like they think the Newco stock would be purchased for $0.10 per share. If the company is willing to issue 10 million shares (after the reverse split) in exchange for $1 million dollars then company is suggesting that they are effectively placing a value of $1 million on 46% of the company stock. Under this market tested data point the implied value of the company would be about $2.17 million. Under this method, the value of QSGIQ would appear to be $0.005 because there is a willing buyer and a willing seller at a Newco stock price of $0.10 which has to be adjusted for the 20:1 split to get the QSGIQ value.

I have seen some price predictions of over $2 per share for QSGIQ. This is irrational nonsense. Here’s why. There are approx. 31 million QSGIQ shares outstanding right now, so $2 per share would supposedly mean that the collective stake of QSGIQ stockholders in the new stock would be $62 million. According to the POR, these stockholders will own 13% of the new company. If 13% of the new company is supposedly worth $62 million then that would mean that the total equity in the new company is worth $477 million. If you read the POR and DS it states that the unsecured creditors would have received no recovery in liquidation. Quite simply this strains the sensibilities to think that a company could be hopelessly insolvent in bankruptcy but somehow $477 million could be created out of thin air. It would also mean that the company would supposedly be valued at 795 times the 2011 estimated EBITDA.

With all that having been said, I have no idea how high the stock can or will go based on the pumping and euphoria. The level at which it trades won’t change how little it is actually worth, which is in a range of $0.005 to $0.0069.